The decision to operate a unit trust scheme or invest in one should not be made without a good understanding of the tax implications.
A unit trust is a form of collective investment which allows investors with similar investment objectives to pool their funds together and thereafter invest in a portfolio of securities or other assets that would be of beneficial interest to the investors. A unit trust scheme may be open-ended or close-ended. The Investments and Securities Act (ISA), 2007 is the legislation that regulates the operation of collective investment.
ISA defines a collective investment scheme as "a scheme in whatever form, including an open-ended investment company, in which members of the public are invited or permitted to invest money or other assets in a portfolio. The investors share the risk and benefit of investment in proportion to their participatory interest or on any other basis as determined in the deed. There are several collective investment schemes that are considered acceptable by the Security and Exchange Commission (SEC) in Nigeria. The prominent schemes include the following:
- Open-ended investment scheme: this is a collective scheme that continually issues and redeems units (shares) after the initial public offer. The price of the unit is based on the net asset value, which is the sum of all the asset of the fund less all liabilities as at date of acquisition or redemption.
- Closed-ended investment scheme: the closed-ended fund does not constantly reissue nor redeem additional issue of new units. Most times, it is listed and traded on the Stock Exchange and its price is determined by the market forces.
- Real estate investment scheme (REIS): this scheme directly invests in both profit making real estate and related companies properties by utilising pooled funds from subscriptions of its participant investors / unit holders.
- Venture capital fund: this is profit seeking scheme by entrepreneurs, whose primary objective is to provide fund to new and growing businesses with the sole aim of long term profit. It is usually an initial stage of financing new and developing companies seeking to develop quickly. Institutional investors (i.e. pension fund administrators and insurance companies, etc.), affluent individuals and corporate organizations are some of the sources of venture capital funds. The risk of return under this scheme is very high.
- Specialized fund: this is mutual fund that invest in securities of a particular sector, industry or geographical location. This kind of fund is notable for higher risks and returns when compared to other funds as a result of lack of diversification of the portfolio of investment.
In Nigeria today, unit trust scheme and REIS are the most practiced schemes. Several financial institutions operate unit trust schemes. The scheme is considered to be beneficial for the development of the Nigerian capital market and gives assurance to investors as regards the management of their funds.
The decision to operate a unit trust scheme or invest in one should not be made without a good understanding of the tax implications. The Companies Income Tax Act (CITA) recognizes the importance of an authorized unit trust. The trustee of an authorized unit trust scheme are treated as a company and the unit holders treated as shareholders. The profits earned by a unit trust are subject to tax in the hands of the trustees. Furthermore, any income distribution to the unit holders are treated as dividends since the rights of such unit holders are deemed to be shares in the unit trust scheme.
The dividend received by a limited liability company from a unit trust scheme is exempt from tax. Therefore, there is no obligation to withhold tax on the dividend payable to companies that are unit holders in the scheme.
However, where any dividend is received by an individual from a unit trust scheme, personal income tax (PIT) is required to be accounted for on such income, as there is no specific exemption stipulated in the Personal Income Tax Act (PITA) in this regard. Consequently, the trustee of the scheme will apply withholding tax at 10% on the dividend and remit same to the relevant State Internal Revenue Service. In recent times, Lagos Internal Revenue Service (LIRS) has been aggressive in its drive to collect tax from unit trust scheme with respect to dividend distributed to individual unit holders.
There have been stories of trustees of unit trust schemes resisting this aggressive posture of LIRS on the ground that the exemption that applies to corporate unit holders should be extended to individual unit holders. This is a matter of what is good for the goose is not good for the gander, as the tax law does not appear equitable to individual unit holders in this particular instance.
In view of the above, it is expected that an amendment would be made to the tax law to address the seeming controversy highlighted above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.